Annuities Mitigate Retirement Risks

The percentage of households that are at risk for financial issues during retirement jumps from 51% to 60% for households that live off of the interest from their assets instead of purchasing an inflation-indexed annuity. The study, by the Center for Retirement Research at Boston College, suggests that having annuities provides more monthly income in retirement than simply drawing down assets or living off the interest on assets.

The study, which was sponsored by Nationwide Financial, examined two alternatives to annuitization. In the first alternative, households drew down their assets at 4% per year, which is a common strategy suggested by financial planners and investment professionals. In the second scenario, households lived off the interest on their accumulated wealth (estimated at 1.9% annually). The Index uses the conservative assumptions that people work to age 65, get income from reverse mortgages, and annuitize all of their financial assets.

Center Director Alicia H. Munnell said, “Purchasing an annuity is one way that households can ensure that they don’t outlive their assets, but the reality is that most people do not choose this option.”
People with a high net worth are most affected by not annuitizing their assets. The percentage at risk increased from 42% to 47% for those who drew down their assets at 4% a year and increased from 42% to 57% for those who lived off the interest of their assets. Higher income households typically rely on the return on their assets while lower income households typically rely on Social Security for most of their retirement income.

Brad Davis, vice president of retirement income solutions for Nationwide Financial Services said, “The latest analysis of the NRRI demonstrates the important role that annuities can play in helping people plan for retirement. It also highlights an opportunity for advisors to help educate clients about what options are available as they develop their retirement income strategy.” To get the full report, visit http://crr.bc.edu.